Stocks pushed through the prevailing anxieties to end July with a 2% gain. That put them ahead 10% for the year so far. Not bad, particularly in the face of media warnings that the economies of both the U.S. and Europe face imminent collapse.
Each faces complex and serious problems but responsible people continue to seek solutions together in contrast to many prior crises when similar efforts were abandoned, leading to economic failures or even wars. One of the great accomplishments of the European Union has been to soften political quarrels among its members. Their relations are now being tested as inequalities strain the system but the consequences of dissolution are so severe that muddling through to continuing cohesion is likely.
After all, as a single market, the European Union generates a Gross Domestic Product of over $17 trillion, making it the largest economy in the world. The U.S. generates $15 trillion, twice that of China. It is the drum major, out in front of the marching band and its GDP growth remains sluggish at a 2% rate.
The U.S. faces a much-publicized “fiscal cliff” of scheduled tax increases and spending cuts at the beginning of 2013. This will be a subject of campaign politics for the next three months. After that, the lame duck Congress will enact some short-term fixes at the last minute, just as these same legislators did last year with the legislatively created debt limit. China, which need not trouble itself with elections, will boost its economy by government mandate.
The consequences of any of these economies slipping back could be severe, however, such cataclysms are improbable. None would be fatal and the indicated action continues to be building capital through quality stocks rather than burying gold coins and cans of tuna fish in the backyard.
Looking past short-term fluctuations, energy demand will continue to increase. Despite a current oversupply of natural gas, traditional energy supply sources are shrinking. One beneficiary of these trends is Schlumberger (SLB-$71), the global leader in providing solutions and services to the oil and gas exploration and production industries worldwide. It is an exemplary international company with 113,000 people of over 140 nationalities working in 65 countries. Schlumberger believes there is sufficient evidence of climate change to start work toward solutions, initially through capture and storage of carbon dioxide.
For the June quarter, Schlumberger beat Wall Street estimates on both sales and earnings, showing its strength in international and deep-water markets. Recently raised earnings estimates call for $4.35 this year and $5.25 in 2013. Yield is 1.5%, less than big oil producers but its technological capabilities will provide longer-term rewards.
Toronto-based Brookfield Asset Management (BAM-$33) is another global company, although it is probably unfamiliar to many investors. It was founded in 1890 as Brascan to develop electrical and tram companies in Brazil. Its operations are global and its assets over $150 billion, centered on real estate, infrastructure and electrical power generation, including substantial hydropower.
Among its assets, Brookfield Asset Management owns stakes in Brookfield Infrastructure Properties (BIP-$34) and Brookfield Office Properties (BPO-$17). These are spin-offs from BAM that I previously recommended for their dividend yield and prospects for growth. The parent company (BAM) will distribute later this year a 10% interest in a new spin-off, Brookfield Property Partners.
This will be another publically traded partnership like BIP with an indicated initial yield around 4%. The spin-off will establish a public market for this new stock, a motivating reason to buy Brookfield Asset Management (BAM). It is trading at a substantial discount from its book value and yields 1.7%.
Book value is a superior criterion for asset management companies as earnings reports may be misleading. All these Brookfield’s may be confusing but the smaller ones have done well for us. Brookfield looks for substantial assets with staying power, a very worthwhile principle for selecting stocks for investors’ portfolios.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/